As it turns out, by mid-May, it appeared as if the naysayers were right. This most recent downturn has left many crypto investors jumping ship, and many are asking if this downturn is a foreshadow of what will happen to stocks, too. Let’s dig deep into this topic.
The Perfect Storm
To understand the future repercussions of the latest downturn in the cryptocurrency markets, it is important to understand what caused it in the first place. For those who do not keep up with the news, it seemed as if the latest downturn came as a complete surprise, but there were a few factors that influenced it. When you look at the factors that caused the downturn, it looks like the perfect storm.
One of the factors was when Tesla CEO, Elon Musk, announced that the company was no longer accepting Bitcoin as a form of payment over concerns about the impact of cryptocurrency on the environment. The success of crypto depends on the willingness of merchants to accept it as a form of payment. Musk’s announcement came as a blow to the viability of using crypto in the real world. It was feared that other merchants would follow suit.
Almost at the same time as Musk’s announcement, China imposed hefty penalties for Bitcoin mining. China has historically been an area of concentration for Bitcoin mining and the creation of new coins. In the past, China has discouraged crypto and does not have a favorable attitude toward it. It was feared that other countries would follow suit and that this would have an effect on the global crypto market. It was both the timing and magnitude of these events that led to panic selling in the crypto markets.
What Happens Next
It is unsettling for any investor to see their investment down as much as 80%, bit if you look at the history of crypto, you will soon realize that volatility is just part of the game. Crypto is one of the most volatile assets on the market, but despite the dramatic rises and falls, major cryptocurrencies have always recovered from their dips in the past.
Just like the stock market, crypto has historically recovered in the past, and even with the most recent downturn, Bitcoin is still up more than 300% compared to last year. Ethereum is still up by 1,150%, which is still not a bad return on your investment. This does not mean that crypto is still not considered a high-risk investment. There is always a chance that this time will be the exception to the rule, and crypto will not bounce back, so what should you do as an investor?
Will This Affect Stocks
Many investors have been pulling out of crypto and putting the money into tech stocks. It is not likely that the dip in crypto will affect high-quality stocks. While individual stocks and sectors of the market can be just as susceptible to rumors and volatility, if you diversify your portfolio and invest in value stocks, your retirement plans are safe. Crypto and high-volatility stocks can add a little bit of spice to your portfolio, as long as you don’t treat them as the main course.
Taking advantage of compounding and building a retirement fund is a long game. Whether investing in crypto or stocks is right for you depends on how much sleep you lose when your favorite investment takes a downturn. For most people, this question depends on how much is at stake in other areas of their life. For those who are less risk tolerant, treating crypto and high-volatility stocks as a dessert will not affect your ability to maintain your lifestyle in retirement can reap some sweet rewards in the end.